Economist, Telegraph Columnist, Broadcaster

Doing the IMF’s bidding would put Britain at risk

So the UK has dodged the dreaded “triple-dip”. While British GDP fell 0.3pc during the final quarter of 2012, last week came news that our national income increased 0.3pc during the first three months of this year. That meant we avoided two successive quarters of contraction – the standard definition of “recession” and a state this country has already endured twice since the credit crunch was sparked in 2008.

A “triple-dip”, the UK’s first in modern times, would have driven some very nasty headlines for George Osborne. For now, the Chancellor is no doubt allowing himself a sigh of relief. He will be more than aware, though, that for all his “healing” rhetoric, the UK economy remains extremely fragile.

Five years into this sub-prime debacle, GDP per head, adjusted for inflation, is still 6.2pc below its pre-crisis peak. At a similar stage after the recessions of the 1970s, 1980s and early 1990s, real incomes were 6pc-8pc above where they were when the economy began to nose-dive. “Triple-dip” or not, this is our most feeble recovery on record.

As recently as February 2012, the Bank of England was forecasting year-on-year growth of 2.2pc during the first quarter of 2013. The far weaker outcome obviously plays havoc with the public finances. The Government borrowed £15.5bn in March, we learnt last week, taking the total for the 2012-13 financial year to £120.6bn – just £0.3bn lower than in 2011-12. So once again, the Chancellor avoided some ghastly headlines by the skin of his teeth. Higher borrowing would have made a mockery of the Government’s “deficit reduction” plan.

It is against this fraught backdrop that officials from the International Monetary Fund are arriving in London in 10 days’ time for their annual “Article IV” economic health-check. With the IMF having just switched sides in the absurd “growth versus austerity” debate, this will be no routine visit. Having previously backed Osborne’s fiscal consolidation, providing the Chancellor with political cover, the world’s leading economic watchdog is now barking a different tune.

IMF supremo Christine Lagarde now says the UK should “consider slowing the pace” of its “austerity” programme. The fund’s chief economist, Olivier Blanchard, goes further, accusing the Government of making assumptions that “maybe weren’t right” and warning the Chancellor he is “playing with fire” unless he drops austerity and lets government spending rip.

Such statements have piled pressure on Osborne. While the Chancellor has been saved the “triple-dip” and “deficit still rising” headlines, this upcoming IMF visit to London will be easily the most politically significant since 1976 – when a Labour government presented itself “cap-in-hand” and sought an IMF bail-out.

Back then, the IMF’s stone-faced delegation spoke sense. Faced with an insolvent nation, the Washington-based institution made its financial support conditional on sharp government spending cuts.

This time around, while unable to impose its policies given that it’s not being asked for funding, the IMF is talking nonsense – a message which Osborne should not be afraid to convey.

Britain’s fiscal retrenchment, far from “going too far and too fast” as the IMF apparently thinks, has in reality been extremely hesitant. While some government departments have cut back, and there have no doubt been instances of individual hardship, the overall picture is hardly one of consolidation.

In 2010, the Coalition announced it would “start cutting the national debt as a share of GDP” by 2015. In other words, there was a five-year plan to get the annual deficit to zero. That target, of course, has since been pushed to 2018. Treasury figures show that between 2011-12 and 2017-18, government spending will rise from £694bn to £765bn. Even if that happens – a very big if, given that most “cuts” are end-loaded, so yet to come – it would still amount to a real terms expenditure reduction of just 2.7pc over six years. No matter that government spending soared under New Labour, with the state ballooning from around 35pc of GDP in the early 2000s to approaching 50pc by the time Gordon Brown was bundled from office. The UK has anyway continued borrowing upward of £100bn annually in recent years and that shows no sign of abating.

That’s why, even if the “zero deficit” target is hit in 2017-18, our national debt will by then, at around £1,700bn, be three times higher than in 2008. So much for “austerity”. That much bigger debt must also be serviced, of course, constantly draining money from health, education and other front-line services.

Far from “playing with fire” by trying to spend less, the UK would be courting enormous danger if we did the IMF’s bidding and signalled a willingness to spend more. Getting genuine control of our public finances remains, by a very long way, this Government’s most important economic task. Ministers claim financial markets are “rewarding” the UK for “austerity” by demanding only low yields when lending the Government money. This is, unfortunately, some way from the truth – not least because bond-dealers know how to read government balance sheets, so can see that “austerity” is largely a myth.

It has only been virtual money-printing on a vast and unprecedented scale, and the channelling of those funds into effectively forced gilt purchases by the Bank of England and other domestic banks, that has prevented a catastrophic creditors’ strike. That, and the fact that the markets have been focused on the eurozone. The UK remains in grave danger of a sovereign bond market meltdown, whatever the IMF says. Were that to happen, Britain would endure an inflation spike, a crippling rise in borrowing costs and, at the very least, a breakdown of vital public services.

The UK economy is suffering not from a lack of government expenditure, as the Keynesian spend-a-holics would have it, but from depressed exports and, above all, a chronic lack of investment. That’s why it’s unfortunate the cuts we have seen have fallen disproportionately on capital expenditure – where government investments in roads, buildings and other infrastructure, provided they’re the right investments, can help boost growth.

The deep capital spending cuts in Labour’s last 2010 Budget have been tempered by Osborne, but not reversed. Such investment will fall from £47bn in 2008-09 to just £27bn in 2014-15. During the six years to 2017-18, such spending will collapse by now less than 22pc. Current government spending, such as wages and benefits, which contributes nothing to long-term growth, remains flat over the same period. But, then again, cancelling a future investment takes less political courage than tackling the welfare bill and the bloated public sector payroll.

In the end, though, “public investment” mustn’t be allowed to become a cover for higher government spending generally. After all, it is only private sector investment that will really get our economy moving. On that front, endemic policy uncertainties and persistent red tape, on top of a weak global economy, have left the UK in a terrible state.

Private sector investment plunged to just 1.2pc of GDP net of depreciation in 2012, down from 5.8pc in 2007 and an average of almost 5pc in the two decades prior to that. Our overall investment as a share of national income is, by a long way, the lowest in the G7.

It on this that the IMF should focus its attention – counselling higher capital allowances on investment, and pushing our moribund banks to lend – rather than spouting neo-Keynesian drivel. Such rhetoric may help Madame Lagarde in her campaign to clinch the French presidency in 2017. But it does absolutely nothing for Britain.